Monday, October 24, 2016

My Amazon Review of Sebastian Mallaby's "The Man who Knew: The Life and Times of Alan Greenspan"

From Sideman to Conductor of the Global
Economic Orchestra

Sebastian Mallaby has written a
magnificent well-written book about Alan Greenspan and the times that shaped
him. (Full Disclosure: I am mentioned in the book.) It is a story about a
musically talented Jewish kid from Washington Heights who became a sideman
playing the saxophone in a 1940s jazz band and who by the dint of his intelligence
rises to become chairman of the Federal Reserve Board. We follow Greenspan
through his undergraduate days at NYU where is math geekiness shines through to
his stint in an economics graduate program at Columbia. There he meets future
Fed Chairman Arthur Burns and learns the importance of knowing every number in
the economic data set. By doing this he sees the economy from the ground up
rather from the top down approaches of grand theory. His knowledge of the data
will become most useful as his career progresses.

After a brief interlude he forms the
economic consultancy of Townsend-Greenspan and garners a host of industrial and
Wall Street accounts. He becomes the man who knew. About the same time he falls
into the ultra-libertarian cult of Ayn Rand. Somehow he managed to keep the
practicalities of his work separate from the extremes of the cult. In 1959 he
authors a paper describing how share prices influence corporate capital expenditures.
It is a precursor to Tobin’s Q for which James Tobin wins the Nobel Prize in
economics. Simply put when share prices exceed replacement cost there is an
incentive to expand and vice versa. Forty years later Larry Summers jokes that
Tobin owes Greenspan a share of Nobel cash.

By the late 1960s Greenspan catches the
political bug and works as an insider on Nixon’s presidential campaign. It is
from that beginning he has an involvement in every Republican administration
that came later. He learns how to wield power and bests Henry Kissinger in a
bureaucratic fight over an Iran oil deal that never came to pass. By 1980 he was
one of the key negotiators in the aborted attempt to have Jerry Ford become
Reagan’s 1980 running mate. Far from being a sideman he was inside in the thick
of it.

In 1987 Reagan appoints him to chair the
Federal Reserve and of a sudden the stock market crashes. He with others work
to prevent a repetition of 1929 and he comes out of it with an enhanced
reputation. He has an icy relationship with the Bush Administration but gets
along famously with the Clintons. It is then when the late 1990s economy takes
off that he becomes the conductor of the global economic orchestra and is
practically deified for a sustained period of high growth, low unemployment and
low inflation. He rightly diagnoses well ahead of the data that productivity
was surging. That was brilliant, but all those factors lead to “irrational exuberance”
in the stock market.

But herein lies the problem that would
haunt his reputation 10 years later. By targeting inflation and employment he
necessarily ignored the asset markets and their potential to trigger
instability. He ignored the warning of Hyman Minsky who noted that “stability
leads to instability” as investors anticipate that the good times will last
forever. When they don’t the financial system is undermined and with that the
safety and soundness of the banking system.

Greenspan’s critics argue that he should
have stopped the housing bubble of the mid-2000s through increased regulation.
Mallaby rightly argues that getting the regulations right is a difficult task
and in the midst of a bubble it is hard to do politically. Greenspan was
unwilling to spend his political capital on this. Where Greenspan failed was that he believed
that bankers in their own self-interest would prevent risk from getting out of
control. They didn’t. I made a similar mistake in thinking that the Wall Street
investment banks would not end up eating their own cooking by keeping so much
bad paper on their balance sheet. They did. On the other hand Mallaby supports
the critics in thinking that Greenspan should have been more aggressive in
raising rates in 2004-06. To be sure bubbles are hard to detect and there was
belief that the authorities could clean up a mess after the fact, but as it turned
out the cleanup costs in 2008-2010 and still ongoing were enormous.

Mallaby also discusses Greenspan’s
private life. After a failed marriage in the 1950s Greenspan becomes a serial monogamist
dating staff members at Townsend-Greenspan, a speech writer in the Ford
Administration, television personality Barbara Walters, and a host of others
until he marries NBC newswoman Andrea Mitchell.

My few quibbles with the book is that in
Mallaby’s discussion of the economic history he leaves out the importance of
the Garn-St.Germain Depository Institutions Act of 1982 which enabled savings
and loan associations to diversify their asset portfolios. That in combination
with the new Reagan depreciation schedules created a marriage made in hell
between the S&L’s and the tax syndicators that helped overbuild America in
the 1980s. He doesn’t discuss the 1985 Plaza Accord whose effect was to flood
the global economy with money setting up the 1987 crash and the final surge of
the commercial real estate boom. He also fails to note that the Fed missed the
rolling recession in commercial real estate that began in Texas, went to
Phoenix and finally the Fed woke up when it reached New England. But New
England was a weigh station on the road to Southern California and the New York
City metropolitan area. Leaving these points aside I would highly recommend
this book for readers interested in the life of a very interesting man and how
economic policy is really made.

About Me

David Shulman is a Distinguished Visiting Professor at Baruch College where he mentors students seeking front-office careers on Wall Street, a Senior Economist at the UCLA Anderson Forecast and was a Visiting Professor at the University of Wisconsin. He retired from Lehman Brothers where he was Managing Director and Head REIT analyst. From 2001-04 he was voted on the Institutional Investor All Star Teams including First Team in 2002. Prior to joining Lehman he was a Member at Ulysses Management LLC (1998-99).
From 1986-1997 Mr. Shulman was employed by Salomon Brothers Inc in various capacities. He was Director of Real Estate Research from 1987-91 and Chief Equity Strategist from 1992-97. He was widely quoted in print and electronic media and he coined the terms “Goldilocks Economy” and “New Paradigm Economy.” In 1991 he was named a Managing Director and in 1990 he won the first annual Graaskamp Award for Excellence in Real Estate Research from the Pension Real Estate Association.
A graduate of Baruch College (1964), Mr. Shulman received his Ph.D. (1975) with a specialization in Finance and a M.B.A. (1966) from the UCLA Graduate School of Management.